Ten years ago, the global economy was under stress, with few analists in the path of anticipating properly what it was a few week away(September 15,2018).The fall of Lehman Brothers, ignited the beginning of the worse economcic recession so far in this century. Beyond the events which followed that day , it is interesting to take a limited review about some factors which may give a clue about the origin of such extraordinary policy failure, because markets do not act either on its own or, outside the legal framework.But what may be worth to take a look into?
a.- Even considering the 2008 a policy failure, this conclusion does not come straight.This is so, because financial activities work on the basis of trust,reciprocity, and beliefs.For such a behavior, it is not only a matter of policy, but also about the underlying variables which influence the perception of uncertainty, which most of the financial activities work under.
b.- Whether it was not a policy failure, what was it?.An hipothesis is the so called "Implicit Guarantee", which is equivalent to a Central Banks in the shadow, as a lender of last resort. It is not real , but it may be ready to provide help to financial instituions when troubles about out of control uncertainty arises. Where this "Implicit Guarantee" comes from? .The "Implicit Guarantee" approach of economic and financial agents, arises from past experience, (What Central Banks did in similar past events), CEO Central Bankers preference about neutrality (Whether the policy approach is to allow market adjustment mostly by itself through expectations). This two variables,at that time, were on the side of boosting financial risk, than otherwise. Thus there was an " Implicit guarantee" and a preference for neutrality, which was equivalent to give a green light to higher level of financial risk. But none of them, dealt with economic policy by rather about perception. Markets operators and Banks, percieved that there was no limitation to push risk higher in investment porfolio.In fact , Banlks borrowed USD 30-40 of debt, for every dollar they had as Capital.-
c.- Regulation seems to be a critical variable to boost irrational exhuberance. However, regulation comes in place after the perception about the way the systenm cover further risk.In fact, the marketys operator , ask themselves how far the risk may go given a certain regulation which become a constraint whether it is low or high . Sure, lower regulation allow to go further on risk level, but the safety net to do that come from the "Implicit guarantee".Regulation allocate the kind of risk which are allow to perform within normal conditions of uncertainty, but not necessarily to solve the share of assets exposure to what economic agent percieved as uncertainty .One investor may invest in an heavy regulated investment funds , but if the market conditions get worse for all investors,their losses are not a regulation failure. In the 2008 crisis, the failure was more on the quaiity of the collateral to back up the face value of financial derivatives assets,after the economy start to adjust to the higher interest rates. It follows that , eventually a delay in such policy change, or a better coordination with the financial sector, may have gotten a different outcome .Regulation, seem to come next to those policy decisions.-
d.- Finally, the wealth losses in the household assets, for the private owner was in the range of USD 9,1 billion in the USA economy case, which is equivalent to a USD 35000 per familiy, almost 20% of the average cost for a new home at that time. The higher level of losses were on Wal street (USD 7,0 trillion bail out), and in the economy activity as a Whole (USD 12,8 trillion).This numbers suggest that the social cost of the 2008 crisis, were higher than private ones, even considering the fall out of benchmarking Banks at thast time.The explanation for this outcome, deals with the fact that private citizens has lower transaction cost than society as a whole, to organize a legal strategy of protection and defense for unexpected events. Unemployment , output losses , a zombie financial sector unable to boost economic activity , were all part of the huge social cost society could not protect from on its own, just like in any other economic crisis. This does not mean that it is desirable to induce economic agent to push risk beyond the fundamental of ecoonomic stability, but when it comes to a economcic fall down, the worse prepared are those who regularly face lower levels of uncertainty , such that the probability of getting by surprise is higher.-
